A few weeks ago, David, a co-worker of mine, got on the topic of investing in rental properties. After what seemed like 20 minutes, I found out the following about David:
- He owned a 4-plex ten years ago
- He lost a lot of money
- He hated dealing with tenants
- He will never buy an investment property again
What I deciphered from his story was that he took on too much. He handled every aspect of his rental business (tenant management, repairs, rent collection, marketing vacancies) all while trying to perform well at his day job. Eventually, a few evictions, property repairs, and a couple of seasons of prolonged vacancy was enough to send David packing. The situation was so bad that he sold his property at a $40K loss – ouch!
What is sad about David’s story is that it is not all that uncommon. Hearing David’s story made me realize that I too was on that path. It is in my nature to over-commit and to try and take on everything in my path. In my last article, I discussed how this is still very much a trait I have to work at managing.
In today’s post, I wanted to highlight a few ways I have been able to minimize the day-to-day aspects of my rental portfolio by utilizing local property management.
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The Need for a Property Manager
It was right about when we acquired our fifth single-family rental when thing started to fall apart. Of course, I was trying to handle everything from marketing vacancies and maintenance requests to finding new inventory for our portfolio – all while holding down a demanding full-time job. I should probably mention that our market is located two hours away from our primary residence. Needless to say, it was just too much for me.
I understand that there are plenty of investors who are extremely efficient and juggle everything seamlessly, but I am not one of them. It wasn’t so much that the work was time-consuming, it just wasn’t interesting or what I enjoyed focusing on. When my wife and I initially decided to get into the rental business, we wanted as passive an income stream as possible. We sat down and reviewed our options and decide to start looking for a local property management company to take the reins from me.
Here are a few ways we found our initial property management contacts:
- Craigslist – we looked at companies that were the most active on the site
- Contractors – we asked our local handyman for recommendations
- Real Estate Agents – we reached out to agents we had worked with prior and asked for a referral
- Google – we simply googled “property management” and searched customer reviews
After we compiled a master list, I spent a Saturday afternoon calling everyone on the list (roughly 20 contacts). This was a great exercise because it helped me identify which companies were answering their phones on the weekend (only three did). Of the companies I spoke with, only one was willing to show the property, the others just wanted to check out the keys.
We eventually decided to use a growing company who only managed 40 units. The reason for this was that the larger companies seemed preoccupied with their larger clients and weren’t hungry for my business. I also knew that if I handed over five single-family homes at once, I could probably leverage that for a better monthly rate. It turns out I was right. I was able to negotiate them down from a monthly rate of $85 to $70 per house.
Almost immediately after turning over the properties to our management company, I felt a huge weight lifted from my shoulders. I was able to continue focusing on acquiring new deals while spending quality time doing non-real estate related things on the weekend.
Having dealt with professional property management for the past two years, here are a few additional ways I’ve leveraged their services to increase my cash flow:
Make ready: Once we close escrow on a new property, I forward a list of repairs to our rental coordinator who handles scheduling various contractor visits. He compiles a list of bids for me and I approve the work as needed. An added perk is that our contractors bill the management company, so I don’t even write a check initially for the work.
Walkthrough: I have our handy man walk through all of our properties on an annual basis. I set up a reminder in Outlook; when it pops up, I email our property manager who coordinates the walkthrough with our tenants.
Funneling information: I’ve asked our management company to contact me only during 8:00 a.m. to 5:00 p.m. weekdays unless of course the matter is extremely urgent. I’ve also asked them to only advise me if we don’t have rent by the 5th of the month. Mostly all of our correspondence is done via email, so I can address the issues when I have time versus being interrupted by an unexpected phone call.
Eviction and court: In the instance that I have to show up for a court hearing, our property manager is willing to show up in our place.
Problems and solutions: I can’t say we’ve got this item nailed down, but my end goal is to train the company to present me with possible solutions as problems arise. In the past, they would call just to inform me of a problem. Eventually, I would like them to have a few possible solutions for me to choose from. Again, we’re not quite there yet, but we’re working on it.
In closing, let me be clear that no one will care as much about your properties as you will. HOWEVER, hiring a management company doesn’t mean you stop caring about your business – it just frees you up to focus on other aspects of the business. I’m not saying that this is the best option for everyone, but if you don’t have the desire or time to directly manage your properties, this could be a great option for you.